Rieter Holding AG (RIEN) Earnings Call Transcript

Ladies and gentlemen, welcome to the semiannual report 2023 Conference Call and live webcast. I am Sandra, the Chorus Call operator. [Operator Instructions] At this time, it's my pleasure to hand over to Thomas Oetterli, CEO. Please go ahead, sir.

Good morning, ladies and gentlemen. A warm welcome from my side. First, our performance in a nutshell. The first half year was marked by a continuously low market sentiment with respective low order intake. However, our financial performance has substantially improved in the top line and also in the bottom line area. Second, the team has worked on the strategic front. And we have developed a performance program called Next Level. This program entails some very tough decisions. We believe that they are necessary to ensure the long-term success of our company. Next Level should allow Rieter to achieve an ambitious financial performance at any time in the cyclical market of textile industries. In order to get there, however, we will need to make some painful adjustments. I will explain what this means shortly. First, let's look at the agenda. We would like to share with you some insights into the market environment. Then Kurt will elaborate on the financials. Afterwards, I will take you through our planned performance program, Next Level. And finally, we'll give you an outlook for 2023. I will go directly now to Slide 3, and we'll stay quite brief with the key messages on the first half year 2023. Overall, we had a solid financial performance with positive EBIT and net profit. Our order intake was suffering according to the very low market sentiment, driven by a low demand for textile products. However, our backlog is still healthy and covers the second half of 2023 as well as the beginning of 2024. I was positively impressed about our operational improvements. We further stabilized our supply management and were able to achieve a remarkable increase of our sales volume. In the first half year of 2023, Rieter, therefore, increased volumes, strict cost management and improved processes into results. Our gross profit, our EBIT and our net profit showed remarkable improvements. Also, free cash flow improved, but was still suffering from a high level of net working capital. All in all, we made the right step into the right direction and we'll continue to work hard to improve our operational performance. More details will be presented afterwards by Kurt. Let's move now to the market environment on Page #5 and 6. On Page 5, you see the market development of 2021 until 2023, based on purchasing decisions of our customers and not based on deliveries. It is clearly visible that after the very strong semesters in the second half 2021 and first half 2022, the market slowed down dramatically. Although the first half year 2023 is slightly above the second half 2022, we still suffer from a very low investment sentiment. Our expectation is that volumes in order intake will pick up only in the fourth quarter of 2023 at the earliest. On a regular basis, we measure the operating rate of spinning wheels worldwide. You see this on Slide #6. As you can tell, this operating rate is roughly 10 percentage points lower than in 2022. However, we saw in the first 6 months a slight improvement from even lower levels at the beginning of the year. We expect that this will further improve towards the end of the year and that the corresponding demand for consumables, wear and tear and spare parts will probably recover later in 2023. Let's turn to Slide 7 and our presence at ITMA. At the lead exhibition ITMA this June in Milan, we presented many new innovations which demonstrate the technology leadership of Rieter in the industry. Our focus was on technology quantum leaps, which enable our customers to have the lowest cost per kilogram yarn. In addition, we focused on digitization, automation and recycling solutions. The feedback of our customers was overwhelming, and it gives us great confidence that once the market picks up again, our order intake will grow as well. The reservation lists we have for all our new machines were filled within a few days. Let me now hand over to Kurt, who will lead you through our most important financials. Kurt, please.

Thank you, Thomas. Good morning, and welcome also from my side to this call. Let me start with some key figures on Slide 9. In the first half of 2023, global market downturns, which were already apparent in the second half of 2022, led to a low order intake of CHF 325 million. Sales of CHF 758 million were recorded. This corresponds to an increase of 22.2%. Gross profit increased by more than CHF 50 million, the biggest contributor of the sales volume growth. The gross margin increased from 21% to 24% and confirms the improvement of the margin quality. EBIT increased by CHF 35.5 million to CHF 25.2 million or to a margin of 3.3%. Free cash flow in the first half of 2023 was at CHF 10 million. This reflects the positive trend in operating profit, while the net working capital remained at a high level, which means it has not yet contributed to the free cash flow. Net liquidity mirrors the currently high sales volume. Basically, the increase in net working capital is temporarily financed with short-term loans. This is expected to normalize in the second half of the year, when the current backlog is further processed. As you can see on Slide 10, Rieter recorded a low order intake of only CHF 325 million in the first half of 2023, lower than in the corresponding period of the previous year, however, higher than in the second half of 2022. The order intake in almost all regions was characterized by the reluctance to invest in new machines. Only in China order intake did increase due to investments by spinning mills in improving their local competitiveness. At the same time, demand for consumables, wear & tear and spare parts declined due to the global market downturn. We currently see a quite strong project pipeline on the negotiation. However, high interest rates for investments, as well as low demand in textile end markets are weighing on order intake. The business model of components in After Sales is less cyclical than the Machines & Systems. Hence, the reduction of order intake is less prominent. On June 30, 2023, the order backlog was at around CHF 1.1 billion. This is more than CHF 1 billion lower than last June, but still extends well into the year 2024. As in the previous year, cancellations in the reporting period were around 5% of the order backlog, also impacted by the effects of the severe earthquake in Turkey. In the first half of 2023, Rieter posted sales of CHF 758 million, as you can see on Slide 11. This corresponds to an increase of 22.2%. The business group Machines & Systems recorded a very strong project execution despite some postponement because of the earthquake in Turkey. In addition, Machines & Systems and After Sales growth is supported by a base effect. The acquired winder business was only consolidated as of Q2 2022. Consequently, 2022 includes 3 months, while 2023 includes 6 months in sales of this business. The Business Group Components experienced a base effect as the SSM business benefited from a significant peak in a specific market during 2022, but this was not repeated in 2023. Although decreasing, Rieter still faces issues with material shortages. A dedicated cross-functional task force to improve the situation is still in place. Let me move to Slide 12. Gross profit increased by more than CHF 50 million. The biggest contributor is the sales volume increase. The gross margin increased from 21% to 24% and proves the step-by-step improvement of the margin quality. This includes higher price quality, higher productivity and efficiency in project execution, as well as strong focus on cost management. R&D as well as SG&A increased mainly for the following 3 reasons: The base effect from the acquisition consolidated only as of Q2 2022, as mentioned before; expenses for alternative technical solutions to overcome material shortages; and higher marketing expenses related to the ITMA 2023, an important trade fair that only takes place every 4 years. As a result, Rieter posted in the first half of 2023 an EBIT of CHF 25.2 million and an EBIT margin of 3.3%. Finally, let's move to Slide 13. As communicated on July 10, Rieter sold the land in Winterthur which is no longer required for the operations to Allreal. The company is acquiring the land with a total area of around 75,000 square meters. The agreed sales price is CHF 96 million. Transfer of ownership is expected to take place in the fall of this year after fulfillment of the legal and contractual completion conditions. Rieter anticipates a positive impact on EBIT of around CHF 70 million to CHF 75 million in 2023. The result in cash flow is at CHF 85 million to CHF 90 million. The new Rieter campus currently under construction is not part of this transaction. With this, I hand over the word back to Thomas.

Thank you, Kurt. Let's now turn to the next agenda item. Next Level on Slide #14. In my first couple of months here, I had to learn what all of you already know. We are in a cyclical business. In the past, Rieter was financially performing below expectations, not according to yours, but also not according to ours. With the actual cost structure in products, but also in overheads, we risk sliding into negative profitability whenever we face a low market scenario. Therefore, the team has worked hard to develop the program which will enable Rieter to create long-term value for our customers, employees and shareholders. Rieter as a technology leader is planning a performance program called Next Level. Before I present the details, let me say this. This program is extremely urgent, but also contains some painful elements. Given the cyclicality of the business and the company's previous underperformance, we have to make radical changes now. On Slide 15, you see the growth of the program, strengthen our sales excellence, sharpen our customer focus, improve the cost efficiency in our production and optimize our fixed cost structures, the so-called overheads. With this program, we want to create an agility which allows us to stay successful in the cyclical machinery business. Let's move to Slide 16. The challenging market situation over the past 2 years was marked by severe disruptions in the global supply chain, in conjunction with rising material, energy, labor and production costs. I took the share price development of Rieter, and the whole company story is well reflected in the price. The cyclicity of our industry is a threat, and we must create much more resilient responses to it than in the past. On Slide 17, you can see the dilemma we are in when we talk about the cyclical markets. First, our D&A is still driven by new Machines & Systems. In a high market scenario, we create a negative business mix between this business group and the After Sales and Components business groups. In order to execute backlogs, we have to increase our capacities aggressively, add to our supply chain management hassles and invest more into R&D and production. However, when the market drops, we face excessively high cost structures and painful capacity adjustments. Therefore, we must create a solid cost base, which allows us to financially perform well at any time in the cycle. This means agile structures and being brave enough to be selective about which jobs we take on board. Let's move to Slide 18. In all fairness, we have not managed the cycles well enough in the past. In reality, our shareholder return has been insufficient when you look at the EBIT in the last 5 years. Looking indicatively into 2024, based on the low demand in the textile industry now, we bear the risk that Rieter will again deliver negative EBIT margins in a low market scenario. This is an unacceptable scenario for us, and this is why we are taking actions now. Let's move to Slide 19. In Next Level, we are focusing on a few key performance measures. First, sales excellence. Push After Sales and Components business to create a better business mix. In addition, we are adapting our sales processes to capture market opportunities with better prices and more plannable volumes. Second, competitive products. We must bring our product cost down through tougher supplier negotiations and value engineering solutions in the area of simplification and standardization along the whole value chain. Third, effective supply management. COVID and the boom afterwards have shown us the fragility of our supplies, eliminating disruption effects and ensuring a sustainable supply management with second sources for critical components is key for future success. Last but not least, agile structure. We still have too much decision authority at the headquarters. We want to empower our key markets. In addition, we plan to create so-called product power hubs, where product management, R&D and manufacturing footprints for end spinning technologies are aligned. We want to align this in our key manufacturing sites in Germany, the Czech Republic, India and China. Winterthur will become a strong innovation and research location for the group, also being the worldwide competence center for our preparation machines. As a consequence, we aim to close our location in Ingolstadt in Germany and adjust our footprint in Switzerland, Germany and the Czech Republic. On Slide 20, you see the key financial elements of Next Level. The different initiatives shall mostly be implemented in 2023. Some of them might take a bit of additional time into 2024. After full implementation, the expected benefit of Next Level will be around CHF 80 million per year. Considering onetime costs of CHF 45 million to CHF 50 million, we will achieve a payback period of less than 1 year. Now let's turn to the hardest part. Here, you see the planned full-time equivalent reductions on Slide 21. I wish there had been another way. We left no stone unturned. We examined every option available. But if we want to ensure the long-term success of our company, there is no easy way out. We need to make difficult choices now, and we need to make them with urgency. Here's what we intend to do. As of June 30, we had 5,555 own full-time equivalents, with temporary -- without temporary personnel. With the planned overhead reductions and transfers, we shall have a net FTE reduction in the overhead area of around 300 employees. In addition, we intend to adjust our capacities according to the expected volumes for 2024 by another 400 to 600 FTEs worldwide in the area of direct and indirect operations employees. This figure mainly depends on the sale -- on the final sales volumes for 2024. This reduction will happen after the release of temporary capacity which we have in our factories. As a consequence, we expect a planned FTE base of 4,600 to 4,800 employees after the full implementation of Next Level. Please turn to Slide 22. I already said in the initial remarks that Next Level should bring Rieter to a new level of financial performance. Depending on where we are in the cycle, we do have the ambition that we at Rieter achieve always positive results. At any time, this means for our EBIT ambition in a low scenario between 0% to 4%, in the mid scenario between 4% to 8%, and in a high scenario between 8% to 12%. The Rieter Board of Directors and the Group Executive Committee are confident that the planned, strategic and operational measures will lay the foundations for a more profitable and sustainable development of the entire group. I now come to the last part of the presentation, the outlook, which you find on Slide 24. Given the economic situation and the ongoing cyclical market weakness, we expect below average demand for new equipment in the coming months. A revival is not expected until the fourth quarter of 2023 at the earliest. We also believe that demand for consumables, wear & tear and spare parts will not recover until later in 2023. For the full year 2023, Rieter expects a reported EBIT margin of around 5% to 7%. This includes the special effects from the sales of the Rieter area of about CHF 70 million to CHF 75 million, as well as the onetime cost for Next Level of around CHF 45 million to CHF 50 million. Both special items amount together to less than 2% and are included in this reported 5% to 7% EBIT margin. Sales are expected at the previous year's level of around CHF 1.5 billion. With this, Kurt and myself close our presentation and we are now available for your questions.

[Operator Instructions] The first question comes from Christian Arnold from Stifel Schweiz.

Many questions from my side, but I limit [Audio Gap] go back to line. [Audio Gap] you mentioned on Page 22. At the same time, you were saying a negative EBIT in '24 is not acceptable. But looking at the orders and the assumed sales development below CHF 1 billion, I mean the likelihood is very high that EBIT actually is negative in '24. Can you comment on that?

Christian, you are spot on. Thank you for this question. It's clear that when you look at the moment, our half year orders on hand are at CHF 1.1 billion. Now if we are performing in sales, let's say, in a similar way like in the first half year of 2023, something like CHF 350 million to CHF 400 million left. Now assuming that we might have a similar or maybe a slightly better order intake in the second half, you are right, we are landing at about CHF 800 million as a go in position for the year 2024. This would be good enough to achieve sales volume of CHF 1 billion. Why? First of all, if our assumption is right that in the cyclical market, we are expecting towards the end of the year of '23 that the markets will pick up again, they also will pick up again in the first half of 2024. And whatever we sell in the first couple of months of 2024 still is early enough to become sales in the second half of 2024. In addition, it's also important to know that the total cycle time between order intake and sales for our Component business and for our After Sales business is much shorter. So in fact, you in minimum have to add half a year of normal order intake of Components and After Sales, which is definitely above CHF 200 million, probably more to the magnitude of CHF 300 million. So if you take this CHF 300 million of After Sales and Components of half year 1 in '24 plus the CHF 800 million of order backlog, at the moment, I still can confirm that we aim to achieve this CHF 1 billion or even slightly above. However, looking ahead, I cannot yet guarantee that in the New Machines and Systems business, where exactly the market will pick up. But we have seen there are a lot of projects -- Kurt have mentioned that a lot of projects, we are in negotiation. And customers are hesitating first of all, because of financing costs. And secondly, they are hesitating because the textile market -- the end market has not yet picked up. But there also, I believe that towards the end of the year, we will see some light at the end of the tunnel. So the question is right. We have asked that question to ourselves as well. And the answer we gave to you is also the answer we have given to ourselves.

Okay. And then maybe on the expected benefit of around CHF 80 million per year. You said that the program will be concluded '24, maybe '25. So how much of this CHF 80 million savings do you think you can already achieve in '24?

Well, it's difficult to give you an exact number. But let me first try to split this CHF 80 million a little bit because I think this helps to answer that question. So if you take the CHF 80 million, not all of them are personnel-related, because you have seen we have different pillars in our Next Level program. So roughly CHF 50 million is really working on our overhead cost. And the main impacted locations are in Switzerland and in Germany. CHF 20 million, we are expecting from continuous cost leadership and cost reductions on our products. And about CHF 10 million is coming from our improvement in the way how we are managing sales, being a little bit more picky if we can, in all fairness. Being a little bit more picky in the quality of the orders we take on board. So the CHF 20 million, I am expecting to come next year. The CHF 10 million, I'm also expecting to come next year. And the CHF 50 million, this is depending on the consultation we have on our Swiss location here in Winterthur and the German locations. So this might be the case, that some of the savings only start during first half of 2024, somewhere in the first half. But if you take, of this CHF 50 million, 2/3 to come, then I think you probably are on the safe side, and this would bring us definitely to a positive result for 2024.

The next question comes from Emrah Basic from Baader-Helvea.

Yes. Can you hear me?

Yes. Very well.

Perfect. Yes, just another question regarding the cost reduction. So -- or the restructuring program. Do you expect further one-off costs then in 2024? And if so, how much approximately?

So you mean if there are another onetime cost to be expected in 2024?

Yes, when you -- if you proceed with reduction.

No. No. No. We aim -- first of all, the cost we will have actually this year, we will also book this year. And for the remaining, I already announced changes. We would build up a provision by the end of the year. So there should be no onetime costs, net, in the 2024 results.

Okay. Great. And do you see any risks to the execution of the current backlog when reducing your workforce now in the first half?

This is a very valid question. So I think when you go to the chart of the FTE development, you see that there are, in fact, 2 different type of headcount reductions. The first part are overheads. Overheads in administration, overheads in product management, overheads in R&D. They are not so much volume dependent. So those 300 net FTEs have no impact on our execution capabilities. Then we talk more about the 400 to 600 employees, the direct and indirect employees in our production facilities. There, of course, we will not make a onetime cut, but we will reduce capacities according to our execution volumes to avoid that we do have an execution issue at the end. And I can confirm that this company, and I would say the whole industry, is very knowledgeable how to deal with these fluctuating volumes. So we will not do silly and stupid things, but we will reduce those capacities according to the need of the volumes to be delivered.

Next question comes from Sebastian Vogel from UBS.

I have also 2 questions. The first one is on Turkey, and I was wondering if you can share your thoughts on how you think the next sort of 12 months will pencil out in terms of order momentum potentially coming back or how do you think the situation is evolving there with regard to your business?

Well, actually, we have seen that our order intake is on an all-time low. In all fairness, over the last couple of months, order intake was as bad like in the first half year 2020 when we had COVID. This can't be a sustainable level for the market. And we know markets will come back. We have some hope. I have to say that maybe -- and we have announced that at the year-end closing call, we are expecting this after ITMA. We also had fantastic feedback from our customers at ITMA. It was really super impressive also for me to be the first time there. There was an extremely positive feedback from our customers. But we also felt that they are hesitating to push the button now to execute investments because of the financing situation and still some uncertainties because their customers are still also on a low-capacity level. But this will change. I have no doubt at all. The only question is, is it really towards the end of '23, or does it slide into 2024? That's the only -- the real unknown factor. So these new investments into Machines and Systems, we see it should come up towards the end of the year, but maybe it takes another 3 months. Now that's the reason why we are pushing so much now After Sales and Component business, because Component business -- the majority of the Component business is also replacing components on existing machines. So here, we talk much more about the existing installed base. And this does not change. The only question there is how strongly are they utilized, the existing machines? And that's the reason why we have shown the utilization or operating rate of those mills, where we stand at the moment at 70%. Last year, it was 80%. At the beginning of the year, we showed a little bit more than 60%. And in a high phase, it would be up to 90%. So there is still a way to go. But also here, we believe it comes back. And this, of course, helps us also then for sales, because whatever we have as an order intake in Components or After Sales has a much shorter cycle time to become sales. So that's how we see it, expecting -- or to a certain degree also hoping a slightly better second half in order intake than in the first half, and definitely picking up in 2024.

And there, a follow-up specifically on focusing on Turkey with the earthquake backdrop. Sort of, I guess, around like CHF 80 million run rate that you have seen there in terms of sales. Is that also something that we should get used to for a little bit further until all the sort of work has been done that the industry or the local industry can be back at full swing, so to say?

I think in the midterm, you can expect that Turkey is back at full swing. Now Turkey, of course, is also suffering from a low textile product demand, like other countries as well. So now we -- after the earthquake, we made our own investigation. We were visiting every single mill. We were classifying them into totally damaged, to be totally rebuilt, or slightly damaged or having not really issues. And it was quite amazing how fast the Turkish mills came back. They really were doing an extra effort to come back to the market as quick as possible because they see it that they would lose volumes to other markets. Now sale, we have, of course, a couple of mills who have been destroyed and they have to be replaced. And there are plans also to replace them. So to rebuild the building, to buy new machines. But here, it's also a question of financing. The financing will happen via the insurance companies. And this takes a little bit of time. It is not overnight, and you get a couple of millions sponsored by the insurance company. It takes some time. And this will take well into 2024 until we can see that now the order intake in Turkey will pick up. Then you have to add another year until this order intake goes into sales. So the sales volumes for Turkey in 2024, I am expecting still at a low level. But then 2025, later '26, it will come back.

[Operator Instructions] We have a follow-up question from Christian Arnold from Stifel Schweiz.

Yes. A question for Kurt. How much was the external growth? So how much sales came from actually this consolidation effect we still had in H1?

What's the number. Growth in After Sales was CHF 6 million, this I have, and -- all together, roughly CHF 30 million. If you want to ask the exact numbers, give me a call and I can give you the numbers.

Okay. Okay. And I think you had some moving costs for the SAR activities, right? Was that already booked in H1? And if so, how much was this additional cost? And is there anything coming in H2?

No. This is fully booked in H1, in Q2 of H1. And then it's low- to mid-million -- single-digit million number.